The August employment data and Q3 GDPnow estimates don't compute. In August, payroll employment rose by 187,000, wages rose 0.2%, the average workweek increased by 0.1 hours, and the jobless rate jumped 0.3% to 3.8%. The jump in the jobless rate and the implied (weakish) worker's income flows are inconsistent with an economy that reportedly is expanding at a 5.6% annualized rate, according to the latest GDPnow estimates prepared by the economic staff at the Federal Reserve Bank of Atlanta.
If the economy were expanding nearly 3x times its potential, one would expect the jobless rate to remain at least steady and worker's income flows to be growing as fast, if not more, than the product side.
Even if the final Q3 GDP growth rate is one-third lower than the current guesstimate, more robust labor market data is likely. The ISM service sector employment index rose four percentage points to 54.7 in August, the highest reading since late 2021. But, private service sector job growth of 143,000 in August only matched July's gain and was well below the roughly 200,000 average of the first half of 2023. An early payroll survey in August may have missed some monthly new hires.
Also, layoffs remain exceptionally low. New jobless claims at 216,000 for September 2 were the lowest since February—that suggests a sharp reversal in the jobless rate in the September employment report.
The August employment data allows the Fed to "pass" (not raise rates) at the September FOMC meeting. However, the main focus of the Fed has been to slow demand growth, and GDP is a demand-based measure. So, while the recent employment data says no hikes now, the GDP data says more hikes are imminent.
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